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Wall Street ends 2012 riding high on 'cliff' deal optimism

US stocks closed out 2012 with their strongest day in more than a month, putting the S&P 500 up 13.4 per cent for the year, as lawmakers in Washington closed in on a resolution to the "fiscal cliff" negotiations.

The S&P 500's gain for the year marks its best performance since 2009, as stocks navigated through debt crises in Europe and the United States that dominated the headlines. Still, with numerous issues involving budget talks unresolved, markets could still be open to a shock should the deal break down unexpectedly.

Fittingly, in the last session of the year, stocks bounced back and forth on the headlines out of Washington, as both President Barack Obama and Republican Senate leader Mitch McConnell issued statements indicating a deal to avert the cliff was close.

"The worst news could have been the president coming out and saying, 'We don't have a deal and we've giving up,' and he didn't say that," said Ron Florance, managing director of investment strategy for Wells Fargo Private Bank, based in Scottsdale, Arizona.

"My personal scepticism, I don't trust anything out of Washington until it is signed, sealed and delivered, and it is not signed, sealed and delivered."

While a deal on the cliff is not yet official, investors may be ready to take on more risk next year in hopes of a greater reward.

McConnell said an agreement had been reached with Democrats on all of the tax issues in the potential deal, removing a large hurdle in the talks. An agreement is needed in order to avert a combination of tax hikes and spending cuts that many believe could push the US economy into recession.

A source familiar with the matter said an emerging deal, if adopted by Congress and President Barack Obama, would raise $US600 billion in revenue over the next 10 years by increasing tax rates for individuals making more than $US400,000 and households earning above $US450,000 annually.

Despite the uncertainty, the market encountered only occasional bouts of volatility this year. For the first time since 2006, the CBOE Volatility Index or VIX, the market's favoured indicator of anxiety, did not surpass the 30 level, a threshold that usually signals heightened worry among investors.

"Given all the threats in 2012, the VIX was relatively tranquil," said Bill Luby, the author of the VIX and More blog in San Francisco, citing the crises in Spain and Greece, along with constant intervention from the Federal Reserve.

The Dow Jones industrial average gained 166.03 points, or 1.28 per cent, to end at 13,104.14. The Standard & Poor's 500 Index gained 23.76 points, or 1.69 per cent, to finish at 1426.19. The Nasdaq Composite Index gained 59.20 points, or 2.00 per cent, to close at 3019.51.

The S&P 500 closed out 2012 with a 13.4 per cent gain for the year, compared with a flat performance in 2011. The Dow rose 7.3 per cent in 2012 and the Nasdaq climbed 15.9 per cent.

Financials were the strongest of the S&P's 10 industry sectors this year, gaining more than 26 per cent, led by Bank of America, which more than doubled in 2012, and was the best performer of the Dow industrials.

Of the S&P's 10 sectors, only defensively oriented utilities ended the year lower, falling 2.9 per cent.

Gains in Apple Inc, the most valuable US company, helped lift the Nasdaq. The stock rose 4.4 per cent to $US532.17, lifting the S&P information technology sector index up 2.2 per cent. For the year, Apple rose 31.4 per cent, ending with a market value of about $US501.4 billion.

Each of the Dow's 30 components finished the session in positive territory, led by a 3.2 per cent climb in Caterpillar Inc to $US89.58.

Volume was modest, with about 6.06 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, slightly below the daily average of 6.42 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 6 to 1, while on the Nasdaq, four stocks rose for every one that fell.